1.
What is the citation for the Corporate
Transparency Act of 2020 (the "CTA")?
The CTA is Title LXIV of the William
M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021,
Public Law 116-283 (January 1, 2021) (the "NDAA"). Division F of the NDAA is
the Anti-Money Laundering Act of 2020, which includes the CTA.
Section 6403 of the CTA, among other
things, amends the Bank Secrecy Act (BSA) by adding a new Section 5336,
Beneficial Ownership Information Reporting Requirements, to Subchapter II of
Chapter 53 of Title 31, United States Code.
2.
Where are the implementing regulations
for the CTA?
The Final Rule on beneficial
ownership reporting was released on September 29, 2022 (the "Reporting
Rule"). The Reporting Rule takes
effect January 1, 2024.
For background purposes, the
December 7, 2021 Notice of Proposed Rulemaking (and the superseded draft regulations)
are available here.
3.
Does the CTA apply to all companies?
The CTA applies to any company (a)
formed in the United States by the filing of a document with the Secretary of
State (or any similar official) of any state or Tribal Government, or (b)
formed outside the United States and registered to do business in the United
States by the filing of a document with the Secretary of State (or any similar
official) of any state or Tribal Government.
Some companies that would otherwise
be subject to the CTA, however, are exempt from the CTA's reporting
requirement.
4.
What companies are exempt from the CTA's
reporting requirement?
The Reporting Rule exempts 23 categories of
entities from its reporting obligations.
Generally speaking, exempt entities are those that are already subject
to some form of regulation that identifies the individuals who are the
beneficial owners of the entity or who are otherwise in control of the
entity.
The 23 exemption categories are:
(i)
SEC reporting issuer (an entity that files financial
reports with the SEC under Section 12 or Section 15(d) of the Securities and
Exchange Act of 1934)
(ii)
Governmental authority (U.S. federal, state and
tribal governmental authorities)
(iii)
Banks
(iv)
Credit unions
(vi)
Any "money transmitting business" licensed by
FinCEN
(x)
Any "investment company" or licensed "investment
advisor"
(xiii)
Any state-licensed insurance producer
(xv)
Any public accounting firm
(xvi)
Any public utility
(xix)
Any tax-exempt entity (including any charity
that is exempt from income tax under IRC Section 501(a) and other listed types
of tax-exempt entities)
(xxi)
Any "large operating company" defined as an
entity that (1) has more than 20 full time employees in the U.S., (2) has an
"operating presence at a physical office" in the U.S., and (3) had more than
$5,000,000 in gross revenues as reported on a federal income tax return for the
previous year.
(xxii)
Any entity of which the ownership interests of
such entity are controlled or wholly owned, directly or indirectly, by one or
more entities described in paragraph (c)(2)(i), (ii), (iii), (iv), (v), (vii),
(viii), (ix), (x), (xi), (xii), (xiii), (xiv), (xv), (xvi), (xvii), (xix), or
(xxi) of this section.
5.
What is the charitable entity exemption?
Subsection 380(c)(2)(xix) of the Reporting Rule exempts "an
organization that is described in section 501(c) of the Internal Revenue Code
of 1986 (Code) (determined without regard to section 508(a) of the Code) and
exempt from tax under section 501(a) of the Code, except that in the case of
any such organization that ceases to be described in section 501(c) and exempt
from tax under section 501(a), such organization shall be considered to be
continued to be described in this paragraph (c)(2)(xix)(A) for the 180-day
period beginning on the date of the loss of such tax-exempt status"
6.
Is there an exemption for large
companies?
Yes, there is a large
operating company exemption for an entity that (a) employs more than 20
full time employees in the U.S., (b) has an operating presence at a physical
office in the U.S., and (c) reporting $5,000,000 or more in gross receipts or
sales on its last federal income tax return.
7.
What must a reporting company's
beneficial ownership report include?
The beneficial ownership report must include five specified
items of information for each beneficial owner and each company applicant: (a)
full legal name, (b) date of birth, (c) residential address (except that a
company applicant who is in the business of forming companies may provide a
business address), (d) a "unique identifying number" (from a specified list of
documents, including an unexpired U.S. drivers license or an unexpired U.S.
passport), and (e) an image file of the document that provides the unique
identifying number.
For individuals who are not U.S. persons, the "unique
identifying number" may include a non-U.S. drivers license, a non-U.S.
passport, or a national identity card.
8.
Who is a beneficial owner?
A beneficial owner is a natural person who either (a) owns
25% or more (directly or indirectly) of the equity interest in the reporting
company, or (b) has substantial control over the reporting company.
9.
How does a reporting company calculate
25% ownership?
There are different rules for measuring
percentage ownership and applying the right rule depends on whether the
reporting company is taxed as a partnership or as a subchapter-C corporation.
10. How
does a reporting company taxed as a partnership calculate 25% ownership?
A reporting company that is taxed as a partnership
measures an individual's percentage ownership by looking at the individual's
ownership interests in the capital and profit interests in the entity,
calculated as a percentage of the total outstanding capital and profit
interests of the entity, taken as a whole.
If that method does not produce an outcome "with reasonable certainty,"
then the reporting company should apply the "failsafe rule".
The "failsafe rule" treats an individual as
a beneficial owner of the reporting company if the individual owns or controls 25
percent or more of any class or type of ownership interest of the reporting
company.
11. How
does a reporting company taxed as a subchapter-C corporation measure 25 percent
ownership?
For corporations, an individual's
percentage ownership is equal to the greater of: (1) the total combined voting
power of all classes of ownership interests of the individual as a percentage
of total outstanding voting power of all classes of ownership interests
entitled to vote, or (2) the total combined value of the ownership interests of
the individual as a percentage of the total outstanding value of all classes of
ownership interests.
If that method does not produce an outcome
"with reasonable certainty," then the reporting company should apply the "failsafe
rule".
The "failsafe rule" treats an individual as
a beneficial owner of the reporting company if the individual owns or controls 25
percent or more of any class or type of ownership interest of the reporting
company.
12. What
happens if an interest in a reporting company is owned by another corporation,
LLC, trust or legal entity?
The definition of "beneficial
owner" in the Reporting Rule is limited to "any individual" and does not
include legal entities. 31 CFR 1010.380(d). Any interest in a reporting company
held by a legal entity must be calculated with respect to each individual
natural person who has the ultimate beneficial ownership of that interest.
The Reporting Rule provides, generically,
that "an individual may directly or indirectly own or control an ownership
interest of a reporting company through any contract, arrangement,
understanding, relationship, or otherwise . . ." 31 CFR 1010.380(d)(ii).
The Reporting Rule lists several examples
of indirectly ownership, including:
(A) Joint
ownership with one or more other persons of an undivided interest in such
ownership interest
(B) Through
another individual acting as a nominee, intermediary, custodian, or agent on
behalf of such individual
Where an interest in a reporting company is
owned by more than one non-natural person, determining those natural persons
who will be attributed ownership in the reporting company requires the
reporting company to look "through ownership or control of one or more
intermediary entities, or ownership or control of the ownership interests of
any such entities, that separately or collectively own or control ownership
interests of the reporting company." 31 CFR 1010.380(d)(ii)(D).
13. How
does a reporting company attribute ownership to an individual if an interest in
the reporting company is owned by a trust?
With respect to ownership interests in a
reporting company owned by a trust "or similar arrangement", the Reporting Rule
provides a series of rules that determine which individual natural person
should be treated as the individual with attributed ownership. 31 CFR
1010.380(d)(ii)(C).
The trustee of the trust has ownership of
an interest in a reporting company held by the trust if the trustee has "the
authority to dispose of trust assets." 31 CFR 1010.380(d)(ii)(C)(1).
A beneficiary of the trust has ownership of
an interest in a reporting company held by the trust if the beneficiary (i) is
the sole permissible recipient of income and principal from the trust, or (ii)
has the right to demand a distribution of or withdraw substantially all of the
assets from the trust." 31 CFR 1010.380(d)(ii)(C)(2).
The grantor or settlor of a trust has
ownership of an interest in a reporting company held by the trust "has the
right to revoke the trust or otherwise withdraw the assets of the trust." 31
CFR 1010.380(d)(ii)(C)(3).
14. What
is the definition of "substantial control"?
The Reporting Rule
defines "substantial control" through a facts and circumstances test
that requires the reporting company to consider several factors.
An individual exercises
substantial control over a reporting company if that individual:
(A) Serves as a senior
officer of the reporting company
(B) Has authority over
the appointment or removal of any senior officer or a majority of the board of
directors (or similar body)
(C) Directs, determines,
or has substantial influence over important decisions made by the reporting
company, including decisions regarding:
(1) The nature, scope,
and attributes of the business of the reporting company, including the sale,
lease, mortgage, or other transfer of any principal assets of the reporting
company
(2) The reorganization,
dissolution, or merger of the reporting company
(3) Major expenditures or
investments, issuances of any equity, incurrence of any significant debt, or
approval of the operating budget of the reporting company
(4) The selection or
termination of business lines or ventures, or geographic focus, of the
reporting company
(5) Compensation schemes
and incentive programs for senior officers
(6) The entry into or
termination, or the fulfillment or non-fulfillment, of significant contracts
(7) Amendments of any
substantial governance documents of the reporting company, including the
articles of incorporation or similar formation documents, bylaws, and
significant policies or procedures -or-
(D) Has any other form of
substantial control over the reporting company
Because the definition of
"substantial control" is a facts and circumstances test, many
reporting companies and their counsel should consider any facts and
circumstances that might bear on substantial control, including family
relationships among beneficial owners, voting rights, employment agreements and
other arrangements.
15. Are
there any types of individual who are excluded from the beneficial ownership
reporting obligation?
Yes, the Reporting Rule excludes from the
definition of "beneficial owner" the following types of individual:
·
A minor child, as defined in the state in
which the entity is formed, if the information of the parent or guardian of the
minor child is reported in accordance with this section;
·
An individual acting as a nominee,
intermediary, custodian, or agent on behalf of another individual;
·
An individual acting solely as an employee
of a corporation, limited liability company, or other similar entity and whose
control over or economic benefits from such entity is derived solely from the
employment status of the person;
·
An individual whose only interest in a
corporation, limited liability company, or other similar entity is through a right
of inheritance; or
·
A creditor of a reporting company.
16. Does
a reporting company need to identify and provide information about its "company
applicant"?
Reporting companies that are existing before
January 1, 2024 do not need to report their company applicant.
Reporting companies that are formed or
registered on or after January 1, 2024, must identify their
company applicant and provide the same five pieces of information as is
required with respect to a beneficial owner.
17. Who
is the "company applicant"?
For a domestic reporting company, the
"company applicant" is the individual "who directly files the document that
creates the domestic reporting company."
For a foreign reporting company, the
"company applicant" is the individual who "directly files the document that
first registers the foreign reporting company."
If more than one individual is responsible
for the filing of the document that forms or registers the reporting company,
the "company applicant" is the individual "who is primarily responsible." 31 CFR 1010.380(e)(3).
18. What
information must a reporting company provide about its company applicant?
The reporting company should provide the
same information that it provides with respect to its beneficial owners, except
that, if the company applicant filed the document to form or register the
reporting company in the course of the company applicant's business, the
reporting company may report the company applicant's business street address in
lieu of the company applicant's residential address.
19. What
happens if a reporting company is owned, in part, by an entity that is itself
exempt from CTA reporting?
If an exempt entity owns an interest in a
reporting company, and an individual would have a direct or indirectly
ownership interest in the reporting company exclusively by virtue of the
individual's ownership interest in such exempt entity, the non-exempt reporting
company may include the name of the exempt entity in lieu of the information
that would otherwise have been required in respect of such individual. 31 CFR
1010.380(b)(2)(i).
20. What
information should a reporting company report in respect of a minor child who
is a beneficial owner?
A reporting company should not report
information regarding a minor child.
Instead, the reporting company should report information in respect of
the parent or legal guardian of the minor child. The reporting company should indicate, with
respect to such parent or legal guardian, that such individual is a parent or
legal guardian of a minor child. 31 CFR 1010.380(b)(2)(ii).
21. What
information should a "foreign pooled investment vehicle" report?
If an entity would be a reporting company
but for the exemption provided for pooled investment vehicles in 31 CFR
1010.380(c)(2)(xviii) and is formed under the laws of a foreign country, such
entity shall be deemed a reporting company for purposes of beneficial ownership
reporting, except the initial beneficial ownership report shall include
otherwise required information solely with respect to an individual who
exercises substantial control over the entity. If more than one individual
exercises substantial control over the entity, the entity shall report
information with respect to the individual who has the greatest authority over
the strategic management of the entity. 31 CFR 1010.380(b)(2)(ii).
22. What
is a FinCEN Identifier?
Individuals who expect to be included in
many beneficial ownership reports may obtain a unique FinCEN identification
number that may be substituted for the individual's personal information in
beneficial ownership reports.
The Reporting Rule allows that an
individual may obtain a FinCEN identifier by completing an application (on a
form to be specified by FinCEN) that provides the same information as a
reporting company would be required to disclose in a beneficial ownership
report in which such individual was a beneficial owner. 31 CFR
1010.380(b)(4)(i)(A).
A reporting company may also obtain a
FinCEN identifier for the reporting company by submitting to FinCEN an
application at or after the time the entity submits its initial beneficial
ownership report. 31 CFR 1010.380(b)(4)(i)(B).
If an individual obtains a FinCEN
identifier, a reporting company may include the individual's FinCEN identifier
in its beneficial ownership report in lieu of providing the requisite
information items for the individual. 31 CFR 1010.380(b)(4)(ii)(A).
23. Who
is legally responsible for filing a reporting company's beneficial ownership
report?
A reporting company's "senior officers" are
responsible. 31 CFR 1010.380(g)(4).
24. Who
is a "senior officer" of a reporting company?
The "senior officer" includes "any individual holding the
position or exercising the authority of a president, chief financial officer,
general counsel, chief executive officer, chief operating officer, or any other
officer, regardless of official title, who performs a similar function." 31 CFR
1010.380(f)(8).
25. What
happens if another person provides false or misleading information to a senior
officer of a reporting company?
If a person willfully provides false or fraudulent
information that results in the filing of a beneficial ownership report that
contains false or fraudulent information, that person is also liable for the
violation. 31 CFR 1010.380(g)(4).
26. What
are the penalties for failing to file or filing a false report?
An individual who willfully files false information or willfully
fails to file information required to be filed may be fined not more than
$10,000 or imprisoned for not more than 2 years or both. 31 U.S.C.
5336(h)(3)(A)(ii).
27. Is
there a penalty for a reporting company that files its report late?
The CTA provides for a civil penalty of not more than $500
for each day a reporting violation occurs. 31 U.S.C. 5336(h)(3)(A)(i).
About The Author
Jonathan Wilson is the co-founder of FinCEN Report Company with 31 years of experience in corporate, M&A and securities matters. He is the author of The Corporate Transparency Act Compliance Guide (to be published by Lexis Nexis in the summer of 2023) and the Lexis Practical Guidance Practice Note on the Corporate Transparency Act.